This invention relates to protecting a security, securities, a portfolio of securities, or a portion of a portfolio of securities and more particularly to a system and method for determining a premium for insurance for a security.
Investors may invest in numerous types of securities in an attempt to achieve short-term or long-term appreciation in the price or value of the security. In particular, an investor among other things may invest in or obtain an interest in stocks, mutual funds, options, commodities, futures, derivatives, stock index futures, certificates of deposit, exchange traded funds, or bonds by purchasing such securities. Initially, such securities or assets have a purchase price or basis. The investor attempts to maximize the return on investment by selecting assets or securities that either increase in value or do not allow their principal to erode or decline in value. Due to the unpredictable and volatile nature of securities, investors may find it advantageous to protect the principal by preventing any loss that may occur in the purchase price or basis of the security. One way to try to protect against such an occurrence is to purchase an option contract. For example, an option contract gives an investor the right, but not the obligation, to purchase or sell a certain number of shares of stocks or other types of securities at a specific price at a specific future time. An investor pays a price for the right to purchase or sell the certain number of shares at the specific price at a future date. If the investor does not purchase or sell the stock, the investor is out the money paid to purchase the option contract. However, such option contracts are complex, difficult to understand, date limited, risky, and expensive. Further, such option contracts are only available for a limited number of stocks and cannot be purchased for other securities such as mutual funds. Accordingly and unfortunately, options contracts do not offer the protection sought or needed.
Some investors have bought government bonds or debt obligations that are backed or guaranteed by a government in an attempt to protect against a decrease in value in a security. However, such bonds pay an interest rate that is below the market interest rate making it a less attractive security. Additionally, some government-backed bonds require a large amount of money to purchase these bonds. Thus, the purchases of such bonds are only practical for large institutions, banks, or companies. Again, such bonds do not allow an individual investor the opportunity to hedge their risks.
Therefore, it would be desirable to protect an asset or a security from declining in value. It is also desirable to protect an individual's portfolio or a portion of the portfolio that may be comprised of combinations of various securities. It would also be advantageous to offer a product, such as an insurance policy or a warranty policy, for protecting against a change in the value of a security. However, not only is there needed insurance for a security there is also needed a system and method for determining or calculating a premium to be paid for purchasing insurance for a security.
The present invention is designed to obviate and overcome many of the disadvantages and shortcomings associated with attempting to protect a security. In particular, the present invention is a system and method for determining a premium for insurance for a security. The present invention provides for the calculation of a premium for insurance, an insurance policy, or a contract that is used to insure, guarantee, or warrant against a change in value of a security, a portfolio of securities, or a portion of a portfolio of securities. Moreover, the system and method of the present invention can be employed to calculate a premium for insurance for a security that insures or warrants against a decrease or an increase in the price of a security. Further, the system and method of the present invention may be used to calculate or determine a premium to be charged for issuing a warranty policy or contract that warrants against a change in the price of a security.